Another thread is ensuring we get the accounting requirements for schools right. We don’t want to see Charts of Accounts with 600+ items, but instead implement an easy to use Chart and ensure our Tracking features allow the right reports to be easily obtained.

We’ve had a number of discussions with people about their requirements and what they’d like to see in a school accounting solution. And as we move into design and development, we thought it would be useful to create a LinkedIn Group to engage with those that are interested in school accounting.

Feel free to join our  Accounting for Schools group and let us know directly what you’d like to see in Xero for Schools.

Here’s what we’ve learnt:

• Farmers don’t do accounting – they manage their farms.
• As a general rule, farmers don’t keep an electronic record of stock. They just know how many stock units they have. You ask them and they will tell you. They don’t need a computer.
• At end-of-year the closing stock calculations are prepared by an accountant.
• There are two stock valuation methods available for tax purposes, National Standard Cost or Herd Scheme. Both are reasonably technical. The necessary calculations and valuations are done on a spread sheet with the help of an accountant.
• Farmers don’t do monthly stock takes.
• Some farmers receive a bi-monthly cash basis management report from their accountant, but this is not widespread.
• The accountant generally takes care of the GST requirements for the farm.
• Accounting is generally on a cash basis and farmers rarely create invoices. Most accounts receivable invoices are buyer created.
• Most monthly bills are on account at PPG Wrightson, Farmlands or RD1.
• Farms have term debt against the land asset and this is reasonably large.
• Banks offer an improved lending capacity and lower interest rates if the farmer produces monthly accounts that demonstrate good financial awareness and management. Farmers are now taking monthly accounts more seriously, especially those buying a farm.
• The banks also require a budget and most farms now prepare these. Best practice is to prepare an annual budget, but to make quarterly forecasts and then compare actual to the budget and forecast.
• The key performance metric for a farm is the “Economic Farm Surplus”.  This is used by farmers and farm consultants as a basis for improving the financial performance of the farm.
• Having broadband is reasonably common in the farming sector, especially among dairy farms.

What can Xero do?

• Include quantities at the transaction level and a stock reconciliation which ages stock correctly so as to help the accountant prepare the end-of-year stock calculations and journals.
• Provide for cashflow budgeting and the ability to have multiple budgets to allow for the annual budget and the quarterly updated forecast.
• Provide the Economic Farm Surplus Report as a standard report that can be customised in Xero.
• Provide the end-of-year accounts formats for farms, including the correct notes to the accounts.
• For key purchasers in the supply chain, make it possible for their buyer created invoice to automatically appear in Xero.
• Arrange for daily data feeds from the on account trade merchants.

We’re still gathering information, so if you do have any requests please let us know. As you can see there’s lots to do and we’ll be working on it over time, releasing features as we go. A top priority is to enable the quantity capture and data feeds as early as possible, so the accountant can use Xero for monthly reporting, GST and data capture for end-of-year.

The other stream of work we are doing with Federated Farmers is look at how various software suppliers can work together to improve rural productivity. For anyone who wants to join that discussion we’ve set up a LinkedIn group.

Our accounting partners, particularly in the regions, need Xero to be able to do farm accounting as the rural sector is an important part of their business.

Federated Farmers have taken a strong advocacy role for rural broadband. We applaud their initiative to reach out to application providers who need to be able to provide new service offerings via the pipes. It’s the applications that will drive productivity.

Over the past few months we’ve met with many people in the rural solutions industry. We found there are many silos of information and belived that if we could get the industry talking we’d find opportunities for collaboration and identify key areas where working together we could make the boat go faster.

So yesterday the Feds (I love calling them ‘The Feds’) and Xero put on an industry day where the various solution providers and industry players could do a show & tell and build relationships.

It was a fascinating day with some very exciting projects going on.From what we’ve seen to date, we believe there are two main data anchors that could provide a platform for data interchange.

1. Geocode and boundary data provide a consistent way to identify paddocks, farms and farm groups. Events can be recorded that can be linked to that geocode. For example taking a grass measurement or applying fertilizer.
2. Livestock. With a globally unique animal identifier events that happen to the animal, like birth, death, sale or a weight reading can be recorded against an industry wide register

We have a number of specific projects to continue with but I sense there is a real willingness for keep people in the industry to work out a series of standards that will allow the ability to share information and provide farmers and other rural participants to gain access to new types of tools that drive performance, productivity and profitability.

Thee companies presenting included: Xero, Landcorp, Livestock Improvement Corporation, Terralink, Gallaghers, AG-Hub, Rural Trader, Gen-I, Tru-Test, MAF, Farmside, CRS Software, Farmworks PFS, Onto-It, Readynet, Opto and iFarm.

National radio interview available here (2nd half): Radio NZ

We have set up a LinkedIn group to keen the conversation going: Farming in the Cloud. Other vendors (including accounting software vendors) are more than welcome to join the conversation.

If anyone is interested in learning more about the activities please let us know.

Xero to deliver online based school management system

Managing school finances and the various stakeholders can be a nightmare. We’ve heard from many accountants that they avoid school boards because they don’t want to get dragged into the mess and many of our partners have asked when will we do Xero for Schools.

Since we mentioned Xero for Schools last year we’ve had a detailed look at the school software market. From an accounting features point of view – schools sit between normal small business software and low end ERP software. We have quite a number of schools using Xero already, but we believe there is a great opportunity to extend the Xero feature set in a few key areas to deliver a very powerful solution for schools and save a huge amount of money that can be better spent on education outcomes.

Schools are the key first customers in the Government’s Fibre to the Home (FTTH) initiatives. For school principals to create a business case to connect to the new fibre networks, the software industry has to provide quality cloud solutions that can remove local servers and their associated management costs from school budgets.

While Xero should be able to work well with schools on its own, we identified significant additional benefits in integrating school management with financials. We had a good look around at the existing School Management vendors. While there have been some great companies, most of the solutions are dated and the customers at the schools we talked to were very frustrated. Then late last year we met Schola Technologies.Schola operates the school management system SchoolMaster and has been developing a new online solution called Assembly. Assembly helps schools with analysing student learning including, presenting National Standards, the management of planning and assessment by teachers, and student administration – including electronic attendance. Assembly is of a similar generation and design approach as Xero and quite frankly we’re excited about how much better Assembly and Xero will make things for schools and their stakeholders.

We’ve still got a lot of work to do but we’re well progressed in adding key features for schools into Xero over the next few months and hope to be in a position to show the integrated solution during Q3 this year – well in advance of the 2011 school year start.

For us at Xero, schools are a strategic vertical we want to play a part in. As parents we want to see our kids get the best education they can. We hope we can help by making school administration easier and help with the business case for fibre connections to schools.

There’ll be presentations and demonstrations specifically for business on the first day followed by interactive exhibitions. Then on day two the hottest end user products will be the focus when the conference is opened to the general public. As well as exhibits there’ll be 25 presentations divided into core streams of Home, Corporate, Education, Small Business and Rural. So something for everyone.

I’ll be presenting in the Small Business streams where I’ll talk about why online technologies, and why new devices like netbooks, smartphones and ipads, will change how small business is done in New Zealand over the next couple of years. A small businesses can get easy access to a myriad of new services. Whether they want a better lifestyle or want to become a mini-multinational, their technology strategy and the way they communicate with customers using this new technology will have a big influence on how successful they are.

You can find out more about Planet 2010 here. Or go ahead and register for your ticket here.

A lot of the innovation in social media is directly relevant to industry associations which could become a venue for member conversation and connections.

We are hearing that many associations are having issues with falling revenues and membership, possible due the recession and also those industry networking conversations are happening elsewhere – like FaceBook. I haven’t seen too many examples yet of associations picking up that opportunity.

Googling around industry associations, most have a member directory and a bunch of industry partners as sponsors. I suspect that as there is often not a lot of action happening around the industry association websites the benefits to partners is likely underwhelming, leading again to decreasing revenue for the association.

Since the early 2000′s I’ve also followed closely what’s happening in trading portals. As cloud applications develop, industry associations are becoming a natural hub for industry type applications which have the opportunity for possible data interchange and benchmarking. This then leads to a strategic decision that leaders of industry associations need to make. To what extent do they seek to encourage, participate in or become an industry trading portal.

As I was looking for examples I found a great paper that looks at this strategic issue and captured most of the thoughts I’d been having. It is does include the trading portal perspective so may appear a bit threatening – nevertheless the points are important.Could Profit Motivated Trading Portals Displace Associations?

So many good quotes …

If I’m an association (and not also a quasi-regulatory body or performing some other legally required function) in an industry which is not resistant by its nature to industry trading portals, this would scare the hell out of me. It should.

… the smart industry trading portal looking for a competitive edge will gravitate toward owning or building an industry association. Preferably THE industry association.

If your association isn’t at least striking up relationships with the folks running trading portals in your industry, I’d start.

A lot of small businesses think Wal-Mart is unfair. That may be true, but it still put them out of business.

As a Top 5 list, associations need to:

1. Realize that you’re in a fight for your organization’s life here. For perhaps the first time, it’s worthwhile for other organizations to take a profit motivated run at you (or key pieces of what you do) with the aim of displacing you. Worse, by the time the signs of that are obvious to everyone, you’re dead. You don’t have the size and leverage to afford many mistakes.

“The smart industry trading portal looking for a competitive edge will gravitate toward owning or building an industry association.”

The question is whether your association will strike up these kinds of alliances while that option is still on the table. The clock is ticking….

I think many people within associations can see how fast social media and cloud computing is changing the landscape. Hopefully raising this for discussion can serve as a conversation starter and lead to a number of exciting new initiatives.

This is a significant milestone for us as it demonstrates how online software is now crossing into the mainstream. As we’re matching, and in many areas cases exceeding, the features of traditional desktop software we can look at the needs of specific vertical industries and ensure that our platform meets their needs as well.

Many of our accounting partners are using Xero across an increasing base of their customers and if we can handle rural requirements it will be easier for them to switch their entire practice.

Existing farming and rural software vendors out there are faced with a significant investment to move their solution to an online platform.  We are keen to work with those software providers so they can leverage our investment in the Xero accounting engine. By connecting to our Application Programming Interface (API) they get the benefit of the work we’ve done which frees them up to focus on those aspects of their software that really add value to the rural sector.

During the first half of 2010 we’ll be gathering requirements from various industry stakeholders and intend to have first deliverables in the product ready for the start of the July financial year.

We applaud the foresight of Federated Farmers to reach out to application providers so that as broadband gets to the farm – applications will be available to drive productivity.

At Xero we really value the role of the not-for-profits and have always tried to support this sector. For a while now we’ve been looking for a way to formalise this commitment. Today we’re thrilled to announce a partnership with TechSoup New Zealand that meets this objective.

TechSoup NZ provides donated software from companies such as Microsoft to eligible New Zealand charities, voluntary and community groups with charitable status.

“When resources are limited keeping on top of your cashflow is paramount, says Xero CEO Rod Drury.  ”We think Xero will simplify, what up until now, has been a tedious process for the volunteers who run these organisations.”

Through our relationship with with TechSoup NZ we hope to open up the possibility of using Xero for a diverse range of not-for-profits and let them realise accounting can be easy and fun even. We’ll be offering a 25% discount on the first organisation an eligible subscriber signs up with Xero.

For the not-for-profit sector useful functions in Xero include being able to set up recurring subscriptions, produce professional reports, and track profits and losses for any part of an organisation.

If  you or you think someone you know might be interested, have a look at the TechSoup NZ website and follow the prompts for more detail about this offer and how to sign up.

Green IT – not a label I’m a fan of, personally -  is an area I have been following for the last two or three years. Indeed it has been lately discussed and debated at some length at the Institute’s IT Faculty’s monthly technical committee meetings (upon which I sit) – in fact it would be remiss of me not to promote the ICAEW’s IT Faculty conference on Green IT in London next week.

But my sense is that for small businesses, the emergence and establishment of comprehensive environmental accounting will come in two phases; first though individual choice and then later through commercial imperative, whether direct or indirect.

In the immediate term it is likely that the primary motivation for small business owners to get green, whether through the use of smart technologies to mitigate or negate transportation costs for example, or through the careful selection of green suppliers, will be primarily driven by a personal sense of social responsibility and choice.

But in the medium to longer terms I see a strong parallel with the top-down adoption of quality management standards we saw emerge though the late eighties and early nineties. Whether it was through adherence to the British Standards Institute’s BS5750 quality standard or ISO9000, eventually even the smallest businesses at the foot of the supply chain were commercially encouraged, usually by an indirect customer once or twice removed near the top of the chain, to adopt or comply with formalised quality management processes.

So, while early adoption of quality management was mandated as a condition of trade, eventually it became a de facto norm as small businesses came to appreciate the wider commercial benefits it offered them, even if the effort to comply impacted short term profitability.

And so I suspect the same will be true for many businesses when it comes to environmental accountability. Or is it more complex that that?

The concept is similar to number portability in the telecommunications industry.

I think it’s a few steps short. In the early 2000′s I looked at this very issue. Bank accounts are like IP addresses. Much more useful would be a DNS-like system for bank accounts. You don’t give people your IP address, why give them your bank account number?

Simply linking your bank account number to a more public and easier to remember address, like an email address or web address, would allow you to give your deposit money on your behalf and your bank account can be anything at all.  If you change your bank account, no big deal.

As an example, Jane Smith might have a rental property.  To her tenants she could say:  “Send your rent payment  to jane@smith.com.”

In her banking portal Jane could map her email address to pay into any one of her accounts. If Jane changes her bank – no big deal. The actual bank account number she uses is private and hidden to the world.

Our public bank account could be xero.com. We know it’s globally unique, authoritative and easy for our customers remember.  Much easier than transposing numbers and we could change it between banks as required.

There are so many opportunities for innovation in banking.

We’re very interested to talk to people running school accounting software to understand what their requirements are for school financials.  There is plenty of time between now and beginning of the 2010 school year to look at getting those requirements into Xero.

What types of reports would you want to see? What does your chart of accounts look like? Do you use the MinEd model accounts? How do you use cost centers?

Also keen to know what software you use now? and what other systems we should be talking to – like Student Management Systems?

If anyone would like to be involved in helping to shape Xero for schools, please contact us at info@xero.com.

We’re on from about minute 15 …

http://podcast.radionz.co.nz/ntn/ntn-20090428-1108-Business_-_Rod_Oram-048.mp3

We invited Bronwyn Mullions, Communications Manager for the SBR programme, to write an introductory piece on the SBR for our accounting community:

Standard Business reporting – business reporting made easy

Standard Business Reporting (SBR) is a cross-agency government initiative involving the Ministry of Economic Development, Inland Revenue, Statistics New Zealand and ACC.

SBR is focused on reducing reporting costs for business by simplifying the financial reporting process for providing information to government. SBR will free business owners up to focus on more core business activities.

If given the go ahead from government early next year, SBR will deliver an electronic business-to-government connection so businesses can send their financial data directly to government from their own accounting software package or through a business portal for those that don’t have the necessary software.

The SBR Programme is currently focused on finalising the Interim Stage 2 Business Case which is due to be submitted to Cabinet for a decision in early 2009. If approved, the implementation of SBR will be phased over a three year period ending in 2012.

Further information on the New Zealand SBR Programme is available by contacting our communications team at:

Bronwyn Mullions
Communications Manager
SBR Programme
0064 4 474 2643
bronwyn.mullions@med.govt.nz

We think this is a great government initiative, and we’re keen to hear your views.

Our Xero network continues to grow and one of the interesting parts of my job at Xero is identifying new opportunities and industries to work with.

We have a number of tourism operators using Xero which led me to think about what system would these tourism operators be using for their online bookings, and how could we make their lives even easier?

BookIt is the premier online booking processing service for the tourism industry, providing solutions for many of New Zealand’s leading tourism companies including Tourism Holdings, New Zealand Tourism Online and Christchurch Airport. Suppliers of tourism products including accommodation, activities, tours and transport can benefit from the increased exposure that BookIt offers through the reseller network or use the BookIt system on their own website to take direct bookings.

The BookIt system automates many routine tasks including payments, settlements, vouchering, cancellations, amendments and invoicing. We are working with the team at BookIt to take this one step further by integrating with Xero. If you would like to participate in trialling this integration then we’d love to hear from you – please contact us on network@xero.com.

The main players were of course the politicians, of which all the main parties took part: David Cunliffe from Labour, Maurice Williamson from National, Metiria Turei from the Greens and Rodney Hide from ACT. There was a txt-in poll of who’s ICT policies people liked the most: ACT won the poll but I wouldn’t take that as a read on the election: the fact that they didn’t show up with a spokesperson on ICT policy says a lot and Rodney Hide did a great job of distilling ICT policy down to generic policy talking points (like investment and property rights). I admit I was impressed with the way he handled himself but was out of his depth in a lot of the conversation. Metiria Turei was pushing a fairly innocuous Greens policy – but at least they have a policy and some of her concerns around the digital divide (bringing ICT to the masses) and accessibility (particularly for the disabled) were really on the button. Obviously the big players were Labour and National: Labour trying to push their existing policies and National trying to push an agenda built mostly around their broadband strategy – more on that in a minute.

Some of the issues, such as copyright, privacy and cyber security were great to talk about and I thought everyone handled them well – it’s important that there is policy and enforcement criteria of cyber crime however it’s also important to understand that the internet is just not able to be regulated beyond that – the technology is too fast moving. It was disappointing that the digital divide debate happened after the TV audience turned off (the last hour of the debate was webcast only) – some of Labour’s initiatives have been really beneficial to the wider community and I hope the next government sticks with similar policies. Topics such as convergence and open source were also briefly discussed but didn’t really go anywhere – I would have liked some discussion around how TVNZ could play a role in driving convergence but I don’t think it’s a hot-button issue for voters.

Probably the key issue that was raised was broadband proliferation. This is a very important issue for an organisation like Xero – our distribution model is the internet and so broadband uptake globally is vital. While the other parties talked around the issue Maurice Williamson was able to get National’s policy right front and center. The basics of it are delivering FTTH (Fibre-to-the-Home) through the capital funding of infrastructure (1.5 billion of tax payers money with private capital investment on top of that), aiming to target 75% of all NZ homes in the first 5 years. FTTH is about building capacity into the basic infrastructure of the country (turning broadband infrastructure into a utility) – as opposed to having a mixture of wireless, cable and copper wire for internet use, the aim is to install high capacity fixed line broadband to every home and business in the country, with competition happening at a services level (as opposed to just on speed and data caps). It’s a bold plan but even though FTTH is great (and the concept looks good on billboards) I’m worried that not enough attention is being paid to how important this infrastructure is to our standing in a global market. It’s not about consumer uptake – it doesn’t matter if you see stealth cat on YouTube at 2mbps, 20mbps or 200mbps. The key here is for business: we need to be stimulating ICT growth and innovation – it’s the cornerstone of our knowledge economy. In fact, if refrigeration was the killer app for electricity, growing the knowledge economy and enabling businesses to reach a global market is the killer app for broadband. (Right at the end there was a brief mention of the southern cross cable – it’s all well and good having high capacity internal infrastructure but if you’ve still got one point of failure to the rest of the world then there’s almost no point. No matter who wins the election I hope this gets addressed immediately.)

In the end it was a fun debate and great to be in the audience and look behind the curtain at these kinds of things. I’m definitely not declaring a winner – in the end I’d probably say both Labour and National took even honours (but Maurice Williamson wins for quote of the night: “I’d rather be a rich prick than a prize prick” – I’ll let you look that one up for context )

Congrats again to TVNZ 7 – looking forward to the next one.

You can watch the debate here (best viewed with broadband )

Xero is taking part next week in the Wellington Chamber of Commerce Business Expo to be held in the Town Hall Tuesday 23 September from 10-5pm.

For anyone that’s in Wellington next Tuesday and wants to see the capital’s business movers and shakers peddling their wares, simply email registrations@wellingtonchamber.co.nz. Attendence is free, but you must register either prior to the expo or on the day.

The seminar series will take place from 11 till 4, and covers topics such as: ‘How to improve cashflow’, ‘Difficult conversations at work’ and how to ‘Create interactive business websites’.

For more information read here.

Paula Brown, Business Manager for Sports Auckland, goes into detail about why she highly recommends Xero: it’s easy, everything is online so even if you change personnel there’s no complicated handover to deal with, and of course the time and cost savings.

I work with a lot of different clubs, not just sport clubs, and they’re all talking about those exact same benefits.

FTTH- A bridge to far

I’m concerned that focusing on Fibre to the Home (FTTH) is not the most important thing we should be doing to connect New Zealand small businesses to the world.

The full article follows.

Fibre to the Home (FTTH) is a worthy goal but in my view it’s the wrong focus for our internet aspirations.

The value chain of the internet is from international links, to a national network, to the city, to cabinets, to the last mile.

The international links part of the equation is New Zealand’s bottleneck – not necessarily because of technical limits, but the market encourages those with resources and foresight to build those connections, to price traffic for revenue maximisation, not for the economic and social development goals of a country.

This bottleneck has become so debilitating in terms of the opportunity cost for NZ.inc that traditional free marketers like myself are calling on the government to step in and for the people of New Zealand to own this vital link to connect New Zealand to the world.  

We need to own our own cable because it allows us to change the platform economics to an open access, user pays, cost-plus network.  Bandwidth needs to be an abundant resource for New Zealanders, not a scarce one.

International connectivity is what will make our boat go faster, and is a far easier and cheaper problem to solve.  

If we solve this part of the value chain then the economics around the national, city, cabinet and last mile will fundamentally change.  The market may actually make that part of the equation work.  

$1b dollars would easily fund a new international cable to a major international junction and allow all New Zealand business to have deep electronic relationships with virtually anyone else in the world.  To fund this on a debt basis would only require $100m to cover the cost of capital.  Across New Zealand we spend well in excess of this amount by far so here is a zero cost solution.

This market intervention, where we essentially aggregate New Zealand demand to the world, will fundamentally alter the economics of the last mile. Perhaps with lower cost international connections where business and consumers can communicate in a much richer way to customers we’ll be happy spending more for a substantially better service. So fixing the international links may just fix the last mile anyway.

There is another major economic issue with the FTTH model. Households have a maximum amount of monthly spend on information and entertainment services.  Can households afford both services delivered over Sky and a new content services over a broadband internet connection? Eventually television is likely to be delivered through the IP network. It is unlikely that FTTH can be achieved without the television industry being part of the mix. That will take a few years for broadcast industry to adapt to IP delivery and this is not a delay we can afford to introduce into the equation.

FTTH is a classic inwardly focused ‘what’s in it for me’ New Zealand way of thinking.  We need to think about what really matters – connecting our small, remote, country to the global economy. So while FTTH remains the dream, the fastest way to it is decisive and swift action on our international link.  Let’s create that win and then see where we’re at.

This is a key opportunity for community groups to make the most of ICT and to discover resources that will help their individual, important causes.

There are a number of people involved with this event that Xero has worked with. Key speakers include: Miraz Jordan, Pamela Minnett from YMedia, David Barrow (New Zealand Federation of Voluntary Welfare Organisations), Russell Brown and our own Rod Drury will speak about concerns and issues that need to be addressed when embracing the online world.

This is an introductory level conference, so if it sounds like something you or someone you know would be interested in just jump online and register here.

Listing benefits greater than just cash

NBR’s Shoeshine column last Friday on the new Capital Market Development Taskforce raised the issue of the costs of listing on the NZX. It set out that in some cases the NZX is an expensive place to raise capital.

But for many companies, the benefits of listing are significantly more just the capital raised.
The primary reason for listing is access to capital. If we are going to compete globally it’s important that we have the resources to do things properly. If we don’t then our entrepreneurs are just well meaning amateurs with just a handful making it through to some sort of exit. The effort being so great that once they get their cheque – they check out. That is not the way to build sustainable innovation and commercialisation experience to grow productivity.

For early stage companies in New Zealand requiring a significant amount of capital, the NZX is currently the only place to raise money and still have a long-term chance of New Zealand ownership. Unfortunately, New Zealand’s venture capital market does not have enough depth to do larger deals and once US VC funds are taken, your company is for sale.

But these amounts are still tiny compared to our overseas competitors.

Even with capital, New Zealand businesses are the low cost operator when compared internationally. In our own Xero example, the $15m (at 7.3%) we raised to fund a team of 50 allows us to compete effectively with Australian-listed MYOB, which spent $AU65m on their 1254 staff last year, and FTSE-listed Sage, which had annual people costs of £511m covering 13,500 staff. NASDAQ-listed NetSuite had spent a total of $US70m on product development costs to the end of 2007.

So New Zealand companies have to be very effective with the capital they raise to take on overseas competitors – which we are used to doing because we are used to dealing with constraints on resources.

Listing provides a number of other benefits as well.

Being a listed company is very valuable when exporting overseas. It provides credibility and transparency.

We are finding that new industries like Software as a Service almost require a company to be listed. The software industry is a near perfect market where the incumbents operate a “research and development by acquisition” strategy. Fronting up offshore as private company forces a potential customer to ask: “if I buy your product, you’ll probably end up getting sold”. This was a deadly catch 22 situation that we encountered at my previous company AfterMail, and one of the reasons why we were pushed to an early trade sale.

As a new market entrant the profile around being a listed entity provides the opportunity to accelerate brand building. Some of the costs of capital can therefore be offset against marketing spend.

Bryan Gaynor’s comments in the New Zealand Herald at the weekend show how our capital markets have not kept up with other investments. “The total value of the country’s residential housing stock has surged from $81 billion to $614 billion since the end of 1986, whereas the total value of all domestic companies listed on the NZX has risen from $42 billion to just $62 billion over the same period.”

For us to create a vibrant technology sector, with the opportunity to raise sufficient finding to have a real go, it’s important we fix our capital markets.

The ability for high growth technology companies to raise capital publicly will have a positive waterfall effect on the local venture capital market and angel investment networks, which will see innovation thrive and productivity grow.

So I welcome the taskforce. Fixing our capital markets is an important foundation for making New Zealand a better place to grow businesses.

Trading banks tremble as mezzanine lenders topple

Say a developer wants $1 million to spend on a property: the first phone call would be to a trading bank such as ANZ or Westpac for an initial $600,000, because banks usually loan only a conservative portion for high-risk high-reward commercial projects.

Banks, being naturally cautious, will usually only advance this portion because if the deal goes bad, they estimate they can at least recover 60 per cent of a property’s value, particularly in a forced or mortgagee sale.

First mortgage taken care of.

That leaves the developer still searching for the remaining $400,000.

The second call would be to a second-tier lender like Hanover Finance, regarded as a cut above the rest in the entrepreneurial world of mezzanine funding. Hanover might well stump up $200,000.

Second mortgage resolved, even if the interest bill is about 15 per cent.
That leaves the developer hunting down the remaining $200,000, so a lender-of-last-resort like Bridgecorp might be courted for this amount.

Third mortgage down, even at a punitive 20 per cent-plus interest.

All this works fine in a good market when property prices are rising. But what say the developer gets into trouble, can’t make sales anticipated so can’t repay the interest or principle on the $1 million?

Even worse, often the interest isn’t paid. Rather it is capitalized into the loan. So if the project is delayed or much worse, the market heads south, then the lender of last resort might loose 100% of their financing.

Watch what happens to the costs over 3 years.

Interesting that if the project is delayed (without the end value going up), or if the market moves -those invested in the lender of last resort may loose 100%. Those 12.5% interest rates don’t look like they compensate for risk any more do they?

Connecting that article with Brian Gaynor’s article on the Capital Market Development Task Force:

An open letter to Lianne Dalziel

Brian had this shocking fact

The total value of the country’s residential housing stock has surged from $81 billion to $614 billion since the end of 1986, whereas the total value of all domestic companies listed on the NZX has risen from $42 billion to just $62 billion over the same period.

We just do not invest in productive businesses.

… investors have been driven into the finance company sector in an attempt to achieve higher returns because they have no confidence in the sharemarket.

This finance industry crisis is therefore symptomatic of how broken our domestic capital markets are. It’s time for New Zealand to step back and radically change our structure to create an environment that encourages investment and productivity to allow businesses to flourish – earning the money for the social services we so desire.

http://www.smallbusinesssummit.org.nz

Great money quote:

New Zealand is predominantly a nation of small businesses representing 96.4 per cent of New Zealand firms. In her speech at the 2007 Small Business Expo Hon Lianne Dalziel said “the SME sector is indisputably vitally important to the New Zealand economy. In total the SME sector represents 350,000 business units which provided 59% of all new net employment in the economy from 2001 – 2006. It is the vast potential for growth that makes small business critical to the government’s economic transformation agenda.”

I heard one of the Organisers talking about it in Radio Live today and thought it sounded interesting.  It’s organized by the IBF.

The Independent Business Foundation (IBF) represents the combined interest of the New Zealand small to medium enterprise economy numbering in excess of 350,000 business units covering a broad spectrum of skill and industry sectors. It provides a national voice on behalf of the majority of business sectors which, while numerically strong, lack on their own the collective voice to influence economic policy direction. 

I didn’t catch the name of the organizer but he said the biggest issue that small businesses are facing right now are the skills shortage and education. I’d agree.  

The web can play a big part here.  Not just in software applications but as a place where you can find and share information.

Looking through the program it also looks like they’ve identified another of the big issues.  Planning for succession.  This is a massive issue coming up as the baby boomers seek to exit their businesses and retire.

I also noted on the website a focus on private capital raising in the under $0.5 million market. That’s so important in the space to give our small businesses the oxygen to grow- as well as enable succession by acquisition. All of these point to making SME’s better at financial management. Something we’re passionate about.

I do have to be in Auckland on Friday so will try to pop along for a few sessions.

“The traditional view of Chartered Accountants, glued to the desk and only accessible by appointment at their premises or over the phone is being challenged by changing customer expectations and sophisticated new technology. While many small businesses may still be happy to drop off a cardboard box of bank statements and accounts once a year, smart companies are looking for more value from the person who watches over their finances”

- Keith Newman in the Chartered Accountants Journal, June 2008

Xero is an affordable and complete accounting package that makes it much easier for community groups to manage accounts.

• Shared online access means you have full transparency, accountability and seamless handover
• Anywhere, anytime access for people you designate
• Highly secure & cost effective

A recent article in the Herald “Step up monitoring of trustees, auditors urge” underscores the need for transparency that Xero offers, especially when groups are made up largely of volunteers new to the role.

Seminar Details

Dates: 16 & 17 July
Time: 5:30pm – 6:30pm
Location: Xero offices in Auckland, Wellington and Christchurch

To attend, please register below.

This move saves costs for the Companies Office, reduces paper and speeds up the processing time.   It also makes compliance with company law easier and will save money for business owners.   With the increased availability of broadband, new software and new hardware all provided at highly accessible costs, the cost/value benefits to business owners are clear.  

This is the way to do business and it is the way that more business will be done in the future. The New Zealand Companies Office have always been at the forefront of smart technology use and as we understand are the blue print for many overseas Companies Offices.  We understand that many New Zealand government and NGOs are considering and implementing sensible changes to make doing business online easier and more accessible. We applaud these decisions.

To see more, follow the link to the Companies Office: Important changes to the way you do business with the companies office